Changes to Dutch Accounting Standards for large and medium-sized legal entities Changes to annual edition 2015, including amendments to Title 9 Book 2 NCC Professional Practice Department January 2016
Changes to Dutch Accounting Standards for large and medium-sized legal entities Changes to annual edition 2015, including amendments to Title 9 Book 2 NCC The annual edition 2015 of the Dutch Accounting Standards (DASs) for large and medium-sized legal entities includes several changes. The annual edition 2015 is effective for financial years starting on or after January 1, 2016. Most changes follow from amendments to Title 9 Book 2 of the Netherlands Civil Code and the related Decrees. The annual edition 2015 of the DASs includes new draft standards as well. Draft standards do not yet formally apply. However, anticipating the final standards, draft standards do provide the accounting practice with a certain extent of support and guidance (DAS 100.206). This publication solely outlines the changes. Please note that industry specific changes (such as for banks, pension funds, educational institutions and housing cooperatives) are not addressed. Amendments to Title 9 Book 2 of the Netherlands Civil Code and Decrees Introduction As a result of the new EU Directive on the Annual Financial Statements (Directive 2013/34/EU), several sections of Title 9 Book 2 of the Netherlands Civil Code have been amended. Some Decrees have been amended too, including the Decree on Current Value, the Decree on Financial Statements Formats and the Decree on Accounting Policies for Tax Purposes. These amendments became effective on November 1, 2015. The amendments apply to financial years starting on or after January 1, 2016. Earlier application of new statutory regulations The Act states that the new statutory regulations may already be applied to financial years that have started before January 1, 2016. Our interpretation is that the new regulations may solely be applied to financial years that have ended after December 31, 2014. Effectively, this means 2015 financial years and 2014/2015 non-calendar financial years. Our interpretation is partly based on the Explanatory Memorandum to the new Act. Our interpretation is also in line with the statements in NBA Alert 37 on this subject, published by the Netherlands Institute of Chartered Accountants. If earlier application of the new Act is opted for, all new regulations must be applied earlier. If so, both the new regulations of Title 9 Book 2 of the Netherlands Civil Code and the amended Decrees must be applied in the financial year. 2
Value of the assets (euro) Amendments to Title 9 Book 2 of the Netherlands Civil Code Adjustment threshold amounts The following size criteria apply under the new Act: Micro entity Small entity Medium-sized entity Large entity 350,000 (new) Net revenues (euro) 700,000 (new) Number of employees < 10 (new) 6,000,000 (was 4,400,000) 12,000,000 (was 8,800,000) < 50 (unchanged) 20,000,000 (was 17,500,000) 40,000,000 (was 35,000,000) < 250 (unchanged) > 20,000,000 (was > 17,500,000) > 40,000,000 (was > 35,000,000) 250 (unchanged) A legal entity is classified in the micro, small or medium-sized entities category if at least two out of the three criteria of that category are met on a consolidated basis. A change of category (e.g., from large to medium-sized) solely takes place if the legal entity meets the criteria of the other category on two successive balance sheet dates. When transferring to the new size criteria the adjusted threshold amounts may be used for application of the two-year period for the comparative financial year. Micro entities The new Act includes the new category of micro-sized legal entities (micro entities). Micro entities solely need to prepare an abridged balance sheet and an abridged profit and loss account. For further information on the financial statements of micro entities, please refer to the separate factsheet Changes to Dutch Accounting Standards for small legal entities. Goodwill The new Act stipulates that goodwill must be capitalised. This abolishes the possibilities of taking goodwill directly to equity or profit or loss. Goodwill is written down over the expected useful life. If the expected useful life cannot be reliably estimated then the goodwill is written down over a period capped at ten years. Impairments may not be reversed later on. If goodwill had not been capitalised before, a legal entity must apply a change in accounting policy. The Dutch Accounting Standards Board has introduced transitional provisions according to which a legal entity may opt for retrospective or prospective recognition of this change in accounting policy. If prospective recognition is opted for, goodwill is solely capitalised for acquisitions taking place in or after the financial year in which the change in accounting policy is applied (2016 financial year or, in the event of earlier application, 2015 financial year). If so, no adjustments are recognised for acquisitions in earlier financial years. Under retrospective recognition the new policy may be applied to acquisitions that have taken place as from any prior date to be chosen by the legal entity itself. Under retrospective recognition the comparative figures must be adapted as well. The goodwill amount may change following an acquisition. This may happen when the acquisition price changes on the back of an earn-out arrangement. Or following later changes in the identification or the value of identifiable assets and obligations. Later changes in the goodwill amount are recognised according to the same method as applied for recognition of the original goodwill of the related acquisition. Changes to Dutch Accounting Standards for large and medium-sized legal entities Changes to annual edition 2015, including amendments to Title 9 Book 2 NCC 3
Example: Change of goodwill amount Legal entity M has acquired legal entity D in 2014. M has charged the goodwill directly to equity. As M opts to solely capitalise the goodwill upon acquisitions as from 2016, it recognises the change in accounting policy prospectively. An earn-out arrangement forms part of the acquisition price. This means that part of the purchase consideration depends on D generating certain minimum results over the years 2014 through 2016. D is not expected to achieve the related target results during 2014 and 2015. Hence, no obligation is recorded in the 2015 financial statements. However, based on D s 2016 result a subsequent payment of 100 is due to the seller as at year-end 2016. This correction of the purchase consideration is recognised in 2016, as an adjustment of the acquisition price (DAS 216.242). Since the policy for capitalising goodwill is solely applied to acquisitions as from 2016 (prospectively), the adjustment of the goodwill in the amount of 100 is directly charged to equity. This is in accordance with the recognition of the goodwill upon the acquisition in 2014. Shortening of preparation and publication period Under the new Act, the preparation period for non-listed legal entities to prepare their financial statements is capped at ten months after the financial year. This used to be eleven months. The ultimate publication period has been shortened by one month, i.e., from thirteen months to twelve months subsequent to the financial year. Country-by-country reporting Large legal entities and public interest entities active in the extraction industry (mining) or primeval forest logging, must publish a report showing payments to governments of the countries in which they operate. The contents of such reports are stipulated in the Decree on Report on Payments to Governments. The payments include production rights, taxes, royalties, dividends, license fees and infrastructure improvements. Changes in Decrees Replacement value replaced by current cost The term replacement value in the Decree on Current Value has been replaced by the term current cost. In short, current cost refers to the current purchase or manufacturing price of the related assets in a new condition, less depreciations. According to the Memorandum of Explanation to this Decree, the current cost deviates from the replacement value. The current cost takes into consideration the asset owned by the legal entity. The replacement value, on the other hand, takes into consideration a replacement asset with a similar economic significance. In this respect corrections should be taken into account insofar as the economic significance of the replacement asset deviates from that of the current asset. One of the situations in which this may occur regards differences in the capacity of machinery. We expect this change to have little impact in practice. Inventories no longer at current value It is no longer permitted to measure inventories at current value. They will have to be measured at acquisition or manufacturing price (historical cost) from now on. This does not apply to agricultural inventories, which are still permitted to be measured at current value. Other changes in Decrees The other changes in the Decrees are mainly a direct consequence of the amendments to Title 9 Book 2 of the Netherlands Civil Code as described earlier. Furthermore, the models G and H for preparing the profit and loss account have been eliminated. 4
Other amendments to Title 9 Book 2 of the Netherlands Civil Code Various less drastic amendments for large and medium-sized legal entities have been introduced in Title 9 Book 2 of the Netherlands Civil Code, too. This includes the following. Recognition and measurement: if the useful life cannot be reliably estimated the depreciation period for capitalised development costs is capped at ten years; and the option to take into account a shortly-anticipated impairment upon the measurement of current assets has been abolished. Presentation and disclosure: liabilities with a remaining term of more than five years and collaterals provided no longer need to be disclosed per category of liabilities; disclosure solely applies to the aggregate liabilities; the category extraordinary income and expense in the profit and loss account has been abolished; the obligation to disclose the following matters in the financial statements, instead of in the Other information section: events after balance sheet date whose financial impact is significant, including the amounts involved; appropriation of the result or, as long as this is uncertain, the proposal; profit-sharing certificates and similar rights; new disclosure requirements: disclosure of (1) the nature and size of income and expenses that should be allocated to another financial year and of (2) the amount and nature of income and costs items whose size and occurrence are exceptional; disclosure of the name, legal form, registered office and Chamber of Commerce number of the legal entity; disclosure of contingent assets, contingent liabilities and non-recognised obligations; and disclosure of amounts written down and loans and advances in respect of which a decision was made not to provide them with respect to managing and supervisory directors of the legal entity. Other: the term annual report has been replaced by directors' report ; addition of the obligation for auditors to examine whether the directors' report contains material errors in the light of the knowledge and understanding obtained about the legal entity and its environment during the examination of the financial statements. In addition, the obligation for the auditor to state whether material errors in the directors' report have been identified (including a statement on the nature of any errors identified); and the provision that public interest entities cannot use the exemptions based on the size of the legal entity. Changes to Dutch Accounting Standards for large and medium-sized legal entities Changes to annual edition 2015, including amendments to Title 9 Book 2 NCC 5
New standards for large and medium-sized legal entities Correction of errors DAS 150 states that all material errors should be corrected retrospectively from now on, even if they are not fundamental. The term fundamental error is no longer used material error is the sole term left. An error is material if the error is such that the financial statements fail to provide the required insight as referred to in article 2:362(1) of the Netherlands Civil Code. Measurement of an interest already held upon extension of that interest A step-by-step acquisition involves acquiring control of a company through two or more separate transactions. One of the situations in which this may occur regards an extension to 60% of a 25% interest. Basically, in the event of a stepby-step acquisition the fair values of the identifiable assets and obligations of the acquiree are determined according to the dates on which each separate acquisition is recorded in the financial statements of the acquiring entity. According to this method the interest already held in the acquiree is not remeasured. Still, the Dutch Accounting Standards Board also permits the interest already held to be remeasured. DAS 216.204 now clarifies that this is solely permitted when control is obtained. Hence, not if an interest is extended where there is no change in control. Consolidation exemption for investment companies Additional disclosure requirements have been included in DAS 217 for legal entities applying the consolidation exemption for investment companies. From now on, these legal entities will also have to disclose any equity interests of at least 20% that they hold indirectly, i.e., through or together with their majority interests. Another disclosure requirement regards any limitations imposed upon these minority and majority interests to make dividend or other payments. Likewise, it should be disclosed whether the legal entity has made promises or has the intention to grant these interests financial support, e.g., when obtaining loans. Another clarification states that the majority interests should be considered as investments in equity instruments within the scope of DAS 226 if a legal entity applies this consolidation exemption. Provisions for government levies Government levies are levies imposed by the government other than profit taxes and other than penalties. Government levies may involve a situation where the tax base is based on past activities, while the levy due depends on meeting a condition or conditions in a later reporting period. The question is, which reporting period should the levy be allocated to or, as the case may be, when should an obligation be recognised on the balance sheet. The Dutch Accounting Standards Board has stipulated that a government levy may be recognised according to one of the two following methods (DAS 252.429): in the period to which a government levy relates; or when all conditions governing a government levy are met. The notes to the financial statements of the legal entity should disclose the method applied (DAS 252.429). Severance payments The term termination benefit in DAS 271 has been replaced by severance payment. Severance payments regard payments granted to an employee in exchange for the termination of the employment contract. Severance payments should be distinguished from remunerations in exchange for employee services. As such, a payment granted due to the dismissal, provided the employee continues to be employed for a certain period, is not a severance payment. Instead, it is a payment for services during the remaining term of service. Severance payments are recognised in the profit and loss account as a liability when a legal entity demonstrably and unconditionally undertakes to pay a severance payment. One of the situations in which this occurs is when the legal entity has made an employee an unconditional offer, irrespective of whether or not the employee has accepted the offer (DAS 271.503). When measuring the obligation 6
the chance of an employee not accepting the offer should be factored in. This is because obligations on account of severance payments should be measured at the best estimate of the amounts required to settle the obligations (DAS 271.504). If the dismissal is part of a restructuring, a legal entity should include the costs of a severance payment in a restructuring provision (DAS 271.503/DAS 252.416). Disclosure of audit fees The notes to the financial statements of large legal entities should disclose the fees charged to the legal entity by the audit firm in the financial year (article 2:382a of the Netherlands Civil Code). In practice, audit fees are recognised in the result according to two different methods. According to the first recognition method all audit fees required to audit the financial statements over a financial year are allocated to that financial year. Any audit or other procedures to be performed subsequent to the financial year will be recorded as Audit fees payable. According to the second recognition method, the audit fees are allocated to the financial year in which the procedures are performed. The Dutch Accounting Standards Board has stipulated that there is a strong preference in practice for the first recognition method. This is why DAS 390.301a includes a recommendation to apply that first recognition method to the aggregate fees to be disclosed, irrespective of whether the procedures performed by the external auditor and the audit firm during that financial year have already been performed. Application of the second recognition method for disclosing the aggregate fees (consistently), however, continues to be permitted. DAS 390.301a stipulates that the method for disclosing the aggregate fees for the examination of the financial statements should be disclosed. New draft Standards for large and medium-sized legal entities Result of a partial disposal of an associate company DAS 214 includes new draft Standards that clarify how the result of a partial or complete - disposal of an associate should be determined, if goodwill paid upon the acquisition of the associate has been charged directly to equity. Draft DAS 214.341a clarifies that in the event of a disposal (partial or complete) the goodwill allocated to the part that has been disposed of should be reversed (recycled) proportionally and taken to profit or loss. Transition payments Under the Work and Security Act that became effective on July 1, 2015 transition payments are due upon termination of an employment contract that has lasted at least 24 months. DAS 271.502a includes examples of severance payments and of payments in exchange for professional performances. A new draft paragraph now includes examples of transition payments too. Transition payments due upon termination of an employment contract for an indefinite period of time are considered generally to be severance payments. The related costs are recognised upon entering into the obligation to pay the severance payment. An example of transition payments that are considered to be payments in exchange for employee services, are transition payments related to temporary employment contracts as regards which, upon entering into those contracts, it is highly likely that they will not be extended. The related costs will be allocated to the period in which the services are performed (in this case the term of the employment contract). Contact information For questions, remarks or suggestions: Corné Kimenai (ckimenai@deloitte.nl) and Inge van Sloun (ivansloun@deloitte.nl). Changes to Dutch Accounting Standards for large and medium-sized legal entities Changes to annual edition 2015, including amendments to Title 9 Book 2 NCC 7
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